| Author: Kemberly Wardlaw |
Let's all sing a new version to the tune of the 60's sitcom 'Gilligan's Island'
'Just sit right back and you'll hear a tale, a tale of mishandled use; that started with our nation's past to form a fiscal noose. The tax was a mighty hurtin' vice, our wallets paid the price; working hard to pay our share, it's not always fair, it's not always fair. The economy started heating up, so the Fed put on the breaks; if not for the courage of the consumer's purse, things could've been 'lot worse. The yields hit bottom as we turned our focus to the source of political fate; with deficits, the Speaker too, the President and his wife, those movie stars, the terrorists and Al Greenspan; here and in every state.'
(The opening credits fade and the scene is one we have all experienced)
The relationship between the tax payer and our government is a source of constant and sometimes entertaining debate. Like Gilligan, the tax payer may feel 'slapped around' and unappreciated by a larger, yet necessary, entity. In this analogy, the Skipper represents our government. The decisions made by our elected officials and others of higher political rank may contradict our own opinions. What is the consequence of slapstick government spending and how does it affect you?
When it comes to the nation's monetary policy, the Federal Reserve Bank (a.k.a. the Fed) manipulates the supply of money. It adopts a tight monetary policy when the goal is to restrict the supply of money and an easy monetary policy when the goal is to circulate more money. A tight policy may occur during times of inflationary concerns whereas an easy policy may occur to encourage business expansion.
Here's where the laughter dies and we conclude there is no escape from the island.
The government has several methods to increase money supply and many reasons to do so. Keep in mind, the reasons are generally non-partisan and no one political party is to blame. One such reason, however, is to patch problems caused by government overspending.
When the government is unwilling to act prudently with its expenditures, their bills must still be paid. And when raising taxes is an unpopular alternative (as if anyone is ever happy to accept higher tax rates), printing money may become the default action. Now, if you, a simple citizen of the United States, cannot pay your bills, printing money is not an option. Such acts will land you on a metal bed in a shared cage we all call incarceration. Polite conversations with your spouse and friends will be substituted with arguments from your cellmate named 'T-Bone' regarding the use of one shared toilet. But, the government will print money to compensate for its overspending. It then spends the new money and supply increases.
The joke is now on the hard working citizens of the United States and its set-up is familiar: 'The government and a U.S. citizen walk into a tavern. The government points to the citizen and proclaims to all the patrons 'the drinks are on this guy!' Afterwards, the government finds a new citizen or tax payer and continues the trend.'
In reality, the joke is on us all in the form of inflation. Simply described, with a greater supply of money, the dollar will be worth less than before. Once the purchasing power of the dollar declines, fewer goods and services can be purchased. Inevitably, consumers experience higher prices. The economy seemingly has more dollars but loses its purchasing power. A new character named 'Inflation' finds its way onto our island. And when this occurs, we hope it will only be around for a couple of episodes.
It is important to note, not all prices and wages correlate with periods of inflation. Inflation may result in higher or lower levels of output and employment depending on the sector and type of goods or services. Some may benefit from higher inflation. The effects of inflation often include redistribution of wealth and income, changes in relative prices, and some saving restrictions for important goals such as retirement.
The inflation rate is measured by the Bureau of Labor Statistics (BLS) using the Consumer Price Index (CPI). Today, the inflation rate is about 3.5%. So how long should we expect to live on this low inflation island? This is a difficult question to answer considering it is impossible to calculate inflation going out several years from today. During the past decade, however, we have experienced low to moderate inflation. Still, according to the BLS inflation calculator, $1000 in 1995 has the same buying power as $1258.53 in 2005. Remember early 1979 through late 1981 when inflation rates hovered around 10 percent to almost 15 percent. According to the same BLS inflation calculator, $1000 in 1979 now has the same buying power as $2641.87 in 2005.
It is arguably the uncertainty of inflation that causes the most damage. Preparing for increases in the cost of living is an important aspect to financial planning. Your financial planner can assist you in reviewing inflation trends, introducing inflation adjusted estimates for future income needs, managing tax efficient portfolios, and keeping an eye on government actions. While you cannot control the weather of our economy, preparing your S.S. Minnow for potential rough sailing is important.
(As this episode ends and the closing credits roll, we rejoin the final verse of our amended Gilligan's Island tune)
'So this is the tale of our inflation rates, they're here for a long, long time. You'll have to make the best of things, it's an uphill climb. Our law makers and bureaucrats will try their very best, to make the nation comfortable, with a fiscal mess. No rights, no wrongs, no benefits, not a single guaranty, like generations before yours now, it's challenging as can be. So join us here each year my friend, you're sure to pay your share; with every worker and our government, we make a solid pair.' |
Author Bio:
Wardlaw's belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. With that philosophy, the author assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at www.tools2invest.com or tools2invest@yahoo.com. |
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